Are non-executive directors taking their roles seriously? According to the findings of the Walker Report, released late last year, many NEDs did not look upon the role with the regard needed and had failed to grasp even the basics of the business and industry.
The report implies that this lack of knowledge and interest has led to many of the business failures that have plagued the British economy. Indeed, many have questioned – what were the boards doing?
To combat such glaring indifference by boards Sir David Walker provided the following recommendations:
- Stronger chairmen that are subjected to annual re-election
- Guides should be provided to boards on how they should be run and how chairmen should encourage non-executives to challenge executive teams
- NEDs need to be strong and experienced individuals, willing to stand up and be counted
How can this, what looks like a new, more involved role for NEDs, be balanced with the expectations of executives while still challenging them to get the most out of the business?
“Although Walker focuses on banking, it's likely that its conclusions will seep out into the wider corporate sector. While the challenge of complexity is greater, arguably, in banking, the unavoidable conclusion is that all NEDs are going to have to spend more time in and around the business, in order to understand fully what is going on. This will present a wide range of second order problems - are NEDs being paid enough, will they still be seen as independent, where does one draw the line between executive and non-executive, what impact will this have on their legal liability - that is quite a list! I'm afraid no matter how transparent and informative board packs, and board meetings, are, there is no substitute for getting under the skin of the business (and under the skin of executives!) if you are to be fully informed, and fully accountable,” says Ian Harley, NED and Audit Committee Chairman at John Menzies plc, a NED, SID and Audit Committee Chairman at Remploy Ltd and Associate, Criticaleye.
How much information do NEDs need? To know too much or too little, that is the NED dilemma.
“It is a fine art for a NED to know enough about the business to ask relevant questions and not enough to believe he/she has become an expert and knows better than management!” says Leslie Van de Walle, Non-executive Director, Aviva plc and Associate, Criticaleye. “In my view, the best approach to achieve that balance is to identify with the help of the executive directors the key drivers of value creation and the overall business model and to develop an operational understanding of these throughout several yearly visits in the operating units.”
Although the official papers from board meetings are very useful, it is usually the unofficial meetings that provide NEDs with the true nature of how the organisation is run.
“Board papers should just be a subset of information the exec team use to run the business. Much more valuable are the insights a board member gains from informal contacts: Where do the management spend their time? How do they take decisions? What slows them down? Are they prioritising the things we agreed were most important? Is there any substance to make the strategy a reality? Part of the role of NED board members is to be institutionally uncomfortable. The trick is making sure this discomfort comes out in a constructive way that helps improve things,” says Bernie Waldron, Non-executive Director, Kneip.
It is important to remember that the non-executive board members and executives work for the same organisation, their roles are interdependent and a mutual understanding is needed.
“The non-executives are there to assist, critique, develop, assess core plans, operations and strategy and ensure that previously agreed objectives are being met or if not, why not. They are not there to run the daily business but must have whatever consolidated information exists, to ensure that the major risks and rewards are identified and appropriately acted upon. What information should the board receive from executives? The quick answer is whatever is needed to understand the business, its profit drivers, its core assets and liabilities especially cash and borrowings, its risks and opportunities, its people and other stakeholders,” contends Paul Clarke, Non-executive Director, Brookwell and Associate, Criticaleye.
In essence, the board is in place to be a ‘critical’ friend to the executive team. David Pearson, Chairman, InnovITS and Associate, Criticaleye, says, “The role of the board is to govern the company. The role of the executive is to manage the business. There needs to be a suitable mix of knowledge among the non-executives to be able to challenge the executive in a constructive way. This should not get into micro-management but will need to drill down below top-line reports in order to check that processes are in good working order.”
Richard Laing, CEO, CDC believes that the issue is not of mis – or lack of information, it is one of trust. He says: “If the executives do not trust the NEDs, for example because the NEDs seem uninterested or are too overpowering or critical, then the executives will not be open with the NEDs. The NEDS will then not be given appropriate information. If the NEDs do not trust the execs, the execs will quickly pick this up and become defensive, with the same result: insufficient or inappropriate information to the NEDs. The onus is therefore on the NEDs to engender that trust. If they do not, they will not have access to the information they need, and will be neutered from doing their job.”
If you are interested in this week’s topic, please look at the Insights pages for more information. In Unifying private and public sector boardrooms Criticaleye speaks to Sir Andrew Foster about why boards need to see beyond traditional sector prejudices and take a more collaborative approach. The Inspiring Non-executive Directors Breakfast on 28 April allows NEDs to discuss issues they are facing, if you want to attend please contact your Relationship Manager.
Please get in touch if you have any comments about the issues in today's update.
I hope to see you soon,